Issues in Strategic Investment in the Global Electric Utility Industry
Ghobadian, Abby, Viney, Howard, SAM Advanced Management Journal
Between 1995 and 1998, American electricity utilities spent a combined total of close to $22 billion ([pound]13.75 billion) to obtain the ownership of eight of the 12 Regional Electricity Companies (RECs) of England and Wales. At the height of U.S. ownership, over 16 million industrial, commercial, agricultural and domestic customers in England and Wales bought their electricity from companies headquartered in the U.S. The British experience was not unique. The takeover of the U.K. electricity industry was just one example of the increasingly international reach of American utility companies, and the increasingly global nature of the energy industry.
However, since 1998 there has been a degree of retreat from the U.K. and other countries that U.S. companies have invested in, such as Australia. Ownership of two of the eight companies has been fully divested, while ownership of a further two companies has been partially divested. This partial retreat poses a series of questions that this paper seeks to address: Why were the investments made in the first place, and why has this retreat happened? Were individual investments unsound, or is the whole strategy of investment of this kind of questionable virtue? Does the experience of the various U.S. utilities in the U.K. tell us something meaningful about the future shape of the global energy industry, or about the suitability of certain companies to compete globally?
The U.K. Context
Before addressing these issues, it is necessary briefly to reprise the circumstances under which these series of investments were possible. The U.K. Electricity Supply Industry (ESI) was privatized in 1989 by the third administration of Premier Margaret Thatcher. The privatization was, in Thatcher's own words, "the most technically and politically difficult privatization" (Thatcher, 1993) of the many that occurred in the U.K. between 1979 and 1997. This complexity resulted from an ideologically and economically inspired aim of forcing competition, and hence 'market discipline' upon a former monopoly. Previous privatizations, notably of telecommunications and gas, had seen former state owned monopolies transferred to the private sector. These were seen as being political successes but economic failures. Electricity was to deliver both political and economic success.
A full review of the process of privatization in the U.K. is beyond the remit of this paper, but it is necessary to outline the structure that resulted from the Electricity Act, 1989. The industry was 'de-integrated' into four distinct industries: generation, transmission, distribution, and supply. The former integrated structure was broken into 15 separate companies: two generators, one transmission company, and 12 RECs (responsible for both distribution and supply). There were separate arrangements in Scotland and Northern Ireland.
Of these industries, generation and supply were thought capable of sustaining competition, and timetables for a gradual introduction of competition were introduced. Full domestic competition in supply was achieved in 1999. Our focus in this paper is upon the 12 RECs, but it is important to note that U.S. utilities such as Edison Mission Energy and Enron have become involved in the generation industry.
The U.S. Takeover
Investment of this kind undertaken by the U.S. utilities in the U.K. and elsewhere clearly takes the form of strategic asset or capability seeking investment, as opposed to other forms of foreign direct investment identified by economists (Dunning, 1993). The U.S. companies intended investment of this kind to "protect, sustain or advance the global competitive position of the investing company vis-a-vis its major national and international competitors" (Dunning, 1993, p. 380). Clearly these U.S. utilities, by their actions, were signalling their anticipation of an increasingly global, or at least international, energy industry. …